Dollars & Sense Education

Every week Kelley Greene’s Focus on Retirement Segment in the Wall Street Journal is excellent, this week is no exception.  If anyone has any money left their IRA and would like to donate it to a charity…here are some details.

http://online.wsj.com/article/SB122489075823068591.html

Basically what it says is if you are 70 1/2 or older you can donate up to $100,000 per year from your IRA tax free to a qualified charity.  The same does not hold for a 401(k) or 403(b) and you MUST BE 70 1/2.

Allstate was running an ad awhile back that reminds us of some important facts:

The average woman spends 11 years out of the workforce taking care of family, costing her an average of $659,139 in earnings.

Wow!  Considering that women live longer and make less money anyhow, this is quite scary!

How do they suggest remedying this problem?  The following three suggestions are made:

1)  Make every earning year count in the form of increased participation in 401(k) plans.

2)  Promote Spousal IRAs.

3) Educate: Offer financial seminars for employees and spouses.

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834

Funding a tax-deductible Traditional IRA will garner you an immediate tax break, investments grow tax deferred, but withdrawals are taxed as ordinary income.  A Roth doesn’t offer an immediate tax deduction  but investments grow tax deferred and withdrawals are tax free.  Unfortunately, if you are covered by a retirement plan at work and make more than $116,000 if you are single and $169,000 if you are married filing jointly - you can’t contribute to either.

Non deductible IRAs in the past were a very un-popular investment vehicle.  Contributions are not deductible on your tax returns, they grow tax deferred but are withdrawn at regular income tax rates.  However, in 2006 a new law was passed that said in 2010 individuals who were restricted from contributing to a Roth IRA are allowed to convert their non deductible and deductible Traditional IRAs to Roth IRAs regardless of salary. 

Converting your non deductible to a Roth in 2010 without paying additional taxes is an excellent strategy.  However, be careful not to trigger more tax liability!  Lets say you have $100,000 in a regular Traditional IRA and $25,000 in a non-deductible account.  You would owe taxes on the $21,000 because it would be assumed that the $25,000 was coming pro rata from the whole IRA rather than just the non deductible IRA.  You don’t want to pay taxes twice so what can you do? 

Solution #1: Roll the deductible portion of your Traditional IRA into a 401(k) if allowed.  Then when you go to roll over the non deductible portion into a Roth you will not be double taxed!

Solution #2: Even if you have a large IRA that you don’t want to mingle with non deductible IRA money to be converted, your spouse may not.  If not, your spouse can fund a non deductible IRA until 2010 and then convert it to a Roth.

There are a million and one things to think about when you leave a job for a new one.  New office dynamics, tasks and responsibilities, even new lunch options!  There is one item that comes with leaving an old job that often gets overlooked.  What to do with your previous company retirement account, your 401(k) or 403(b).  You have three options:  rollover your old account into an IRA account, keep your money in your previous employer’s plan or rollover the old account to your new employer’s plan.

What is one to do?  The answer to this question depends on a few things!  I present the pros and cons below. 

Benefits of an IRA Rollover:

Your Old Plan May Be a Bad Deal - It is truly amazing how many bad plans are out there.  Some plans impose atrocious expense rates, wrap charges and other needless costs.

Expand Your Investment Options - Most plans, even the good ones, restrict their participants to a few investment options. Roll your money over into an IRA and you have unlimited options.

Consolidate Your Accounts - By consolidating your old plans into a single IRA you can manage your portfolio in a single account and get complete picture of your investments all in one place. Even more importantly, by rolling out several accounts into one you can sometimes save on expenses.

Avoid the Money Market Trap - In some cases, if your former employer is unable to make contact with you and your previous investment choices in your plan are no longer available, your investments may be placed in some sort of stable principal fund. If you forget to follow up, it may be years before you realize that your hard earned retirement investment is earning 2% a year.

Tracking Your Money - Many plans do not use ticker symbols and are not easily trackable. In many cases this is true for companies whose plans are managed by an insurance company (ING, Hartford etc.) By rolling-over your plan into an IRA you will be able to invest your money in funds for which a public price is posted on a daily basis.

Benefits of Leaving Your Money in Your Old Plan:

Tax Benefits If You Hold Company Stock - This is beyond the scope of this article but if you have company stock in your company retirement plan, contact a financial advisor before initiating a rollover. 

Benefits of Rolling Over Into Your New Employer’s Plan:

Ability to Borrow Penalty Free - This is a highly unadvisable strategy but it is a benefit of an employer plan versus an IRA.

Penalty Free Withdrawals at Age 55 - You must wait until age 59 1/2 to make penalty-free withdrawals from an IRA.  To do so, you must terminate your employment no earlier that the year in which you turn age 55.

The decision whether or not to rollover funds is not always cut and dry.  Do your research and choose wisely!  And remember, a rollover contribution doesn’t count toward annual IRA contribution limits — you can still make your regular contribution.  Also, don’t forget to keep investing in your current employer’s retirement plan — at least enough to collect the full amount of your current employer’s matching contributions. Your retired self will thank you.

Please contact Dollars & Sense Education to bring our seminars to your company or organization!

Dollars & Sense Education - Raising Your Financial IQ!
www.daseducation.com
nicole@daseducation.com
215-499-3834